The State of Data Center Tax Incentives and Legislation in 2023

Tax incentives for the data center industry remain plentiful, but the goals that data center tax breaks aim to serve are shifting. So are the government agencies that devise tax incentives for the industry, with the federal government now assuming a larger role in incentivizing certain data center activities through tax policy.

At a high level, that paragraph summarizes the state of data center tax incentives and financial legislation in 2023. Read for a deeper look at which tax advantages data center owners can capitalize on, and how lawmakers are rethinking such tax breaks.

Data center tax incentives: An overview

Governments have long offered tax incentives to companies that build or operate data centers. Historically, most of those incentives were marked by two notable characteristics:

A typical example is Maryland's sales and use tax exemptions for data centers. Data center providers who build new facilities in Maryland or expand existing ones, and who also create full-time jobs, can skip paying sales and use tax on data center equipment.

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North Carolina has a similar offering, except it extends to sales and use tax breaks on electricity consumed by data centers, in addition to data center equipment.

There are limited examples of local governments providing tax breaks for data centers; for instance, Virginia's Loudoun County, which is home to some of the largest data centers in the United States (and which boasts that it has not seen a day without active data center construction in the county in thirteen years), offers sales and use tax reductions comparable to the state tax breaks described above. But outside of localities where data centers are already booming, there is not much interest among local governments in using tax policy to incentivize data center construction.

Changes in data center tax advantages

There's no reason to believe that state or local tax breaks for data centers are set to disappear. But there are some emerging trends to notice in data center taxation policy and regulation.

One is increasing wariness on the part of some lawmakers toward being too friendly toward the data center industry. Virginian legislators have proposed laws that would place various restrictions on data center siting and increase scrutiny of data center energy and water use, for instance. And in Idaho, one lawmaker wants to place limits on how many financial benefits data center companies can reap from existing tax incentives in the state.

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These developments don't seem to signal antipathy toward the data center industry on the part of lawmakers as much as they reflect a realization that the economic benefits of data center construction are limited. Since modern data centers are largely automated and don't require a lot of maintenance personnel, they don't typically create many new jobs or spur major revenue generation that benefits local businesses. Governments that once encouraged data center construction as a driver of economic growth may be realizing that, while there are some economic benefits to reap from attracting data centers to one's state or locality, they are not as rich as, say, convincing manufacturers to build factories that employ hundreds of workers.

That said, another noticeable trend in data center tax incentivization policy is an increased push by the federal government to reward data center operators who prioritize sustainability. Several provisions in the Inflation Reduction Act of 2022 advanced this goal by, for example, providing financial rewards for purchasing carbon-reducing equipment inside data centers.

The obvious difference between this legislation and traditional tax incentives for data centers is that the federal government doesn't appear focused on encouraging the growth of the data center industry for economic reasons. Instead, it's all about advancing data center sustainability – an area where federal lawmakers are hardly alone, given the current widespread interest in sustainability across the tech industry and beyond.

Conclusion: Shifting tax incentives

In short, governments at various levels remain interested in rewarding data center owners and operators for certain behavior. But going forward, we're likely to see somewhat less interest in encouraging data center expansions for purely economic reasons, and more focus on using tax incentives to support investments in data center sustainability.